Module I

Introduction to Accounting: Need and Types of

Accounting, Users of Accounting, concepts and
conventions of Accounting, Accounting Equations.

DILEEP S 1
 Accounting
Book- & Types
keeping

Origin
GAAP

Users

Introduction

Accounting For Management

DILEEP S 2
 Introduction

Forensic Financial
A/cg. A/cg.

Accounting

Environmental
E-Commerce
A/cg.

DILEEP S 3
 Chandra
Gupta
Mourya
Book Artha
Shastra
4th Century B C
Kautilya

Human Luca P
Civilization Italy
with money
System
Book Summa
15th Century
1494

Origin
DILEEP S 4
Book-keeping
Book-keeping is that branch of knowledge which tells
us how to keep a record of business transactions. It is
often routine and clerical in nature. It is important to
note that only those transactions related to business
which can be expressed in terms of money are recorded.
The activities of book-keeping include recording in
the journal, posting to the ledger and balancing of
accounts.
Definition
R.N. Carter says, Book-keeping is the science and art
of correctly recording in the books of account all those
business transactions that result in the transfer of
money or moneys worth.
DILEEP S 5
 The objectives of book-keeping are
To have permanent record of all the business transactions.
To keep records of income and expenses in such a way that
the net profit or net loss may be calculated.
To keep records of assets and liabilities in such a way that
the financial position of the business may be ascertained.
To keep control on expenses with a view to minimise the
same in order to maximise profit.
To know the names of the customers and the amount due
from them.
To know the names of suppliers and the amount due to them.
To have important information for legal and tax purposes.

DILEEP S 6
Accounting
Book-keeping does not present a clear financial picture
of the state of affairs of a business. When one has to
make a judgment regarding the financial position of
the firm, the information contained in these books of
accounts has to be analyzed and interpreted. It is with
the purpose of giving such information that
accounting came into being.
Accounting is considered as system which collects a
and processes financial information of a business.
These informations are reported to the users to enable
them to make appropriate decisions.

DILEEP S 7
Definition
American Accounting Association defines
accounting as the process of identifying, measuring
and communicating economic information to permit
informed judgments and decision by users of the
information.

DILEEP S 8
Objectives
The main objectives of accounting are
To maintain accounting records.
To calculate the result of operations.
To ascertain the financial position.
To communicate the information to users.

DILEEP S 9
Features of Accounting
1. Identifying
2. Measuring
3. Recording
4. Classifying
5. Summarising
6. Analysis & Interpretation and
7. Communication

DILEEP S 10
Need and Importance of
Accounting
When a person starts a business, whether large or
small, his main aim is to earn profit. He receives
money from certain sources like sale of goods, interest
on bank deposits etc. He has to spend money on
certain items like purchase of goods, salary, rent, etc.
These activities take place during the normal course of
his business. He would naturally be anxious at the year
end, to know the progress of his business.

DILEEP S 11
Count.
Hence, the details of the business transactions have to
be recorded in a clear and systematic manner to get
answers easily and accurately for the following
questions at any time he likes.
What has happened to his investment?
What is the result of the business transactions?
What are the earnings and expenses?
How much amount is receivable from customers to
whom goods have been sold on credit?

DILEEP S 12
Count,
How much amount is payable to suppliers on account of
credit purchases?
What are the nature and value of assets possessed by the
business concern?
What are the nature and value of liabilities of the business
concern?
These and several other questions are answered with the
help of accounting. The need for recording business
transactions in a clear and systematic manner is the basis
which gives rise to Book-keeping.

DILEEP S 13
 Differences between book keeping and accounting
Book Keeping Accounting
In this, financial transactions are In this errors are detected and they
recorded in a set of books are rectified through adjustment

It does not show the result and It show the result and financial
financial position of the business position of the business

It is undertaken by the clear whose It is undertaken by accountant whose

responsibility is less responsibility more

It is concerned with posting the It is concerned with checking

entries in the ledger whether posting is accurately or not

It does not require special knowledge It require special knowledge and

and ability ability
DILEEP S 14
Accountancy
It is the theory and practice of accounting.

DILEEP S 15
Branches of Accounting
Increased scale of business operations has made the
management function more complex. This has given
rise to specialized branches in accounting. The main
branches of accounting are
Cost Accounting

Financial Accounting

Management Accounting.

DILEEP S 16
Financial Accounting:
It is concerned with recording of business transactions
in the books of accounts in such a way that operating
result of a particular period and financial position on a
particular date can be known.
Cost Accounting
It relates to collection, classification and
ascertainment of the cost of production or job
undertaken by the firm.
Management Accounting
It relates to the use of accounting data collected with
the help of financial accounting and cost accounting
for the purpose of policy formulation, planning,
control and decision making by the management.
DILEEP S 17
Users of Accounting Information
The basic objective of accounting is to provide information
which is useful for persons and groups inside and outside
the organisation.
I. Internal users: Internal users are those individuals or
groups who are within the organisation like owners,
management, employees and trade unions.
II. External users: External users are those individuals or
groups who are outside the organisation like creditors,
investors, banks and other lending institutions, present
and potential investors, Government, tax authorities,
regulatory agencies and researchers.

DILEEP S 18
Users of Accounting Information
Users Need for Information
Internal
Owners To know the profitability and financial soundness of
the business.
Management To take prompt decisions to manage the business
efficiently.
Employees and Trade To form judgment about the earning capacity of
unions the business since their remuneration and bonus
depend on it.
External
Creditors, banks and To determine whether the principal and the interest
other lending institutions thereof will be paid in when due.
Present investors To know the position, progress and prosperity of
the business in order to ensure the safety of their
investment.

DILEEP S 19
Count,,
Potential investors To decide whether to invest in the business or
not.
Government and Tax To know the earnings in order to assess the tax
liabilities of the business.
Regulatory agencies To evaluate the business operation under the regulatory
legislation.
Researchers To use in their research work

DILEEP S 20
DILEEP S 21
Basic Accounting Terms
Transactions
Transactions are those activities of a business, which
involve transfer of money or goods or services between
two persons or two accounts.
Cash Transaction is one where cash receipt or
payment is involved in the transaction.
Credit Transaction is one where cash is not involved
immediately but will be paid or received later.

DILEEP S 22
 Proprietor
A person who owns a business is called its proprietor.
He contributes capital to the business with the
intention of earning profit.
Capital
It is the amount invested by the proprietor/s in the
business. This amount is increased by the amount of
profits earned and the amount of additional capital
introduced.

DILEEP S 23
 Assets
Assets are the properties of every description belonging to
the business. Cash in hand, plant and machinery, furniture
and fittings, bank balance, debtors, bills receivable, stock
of goods, investments, Goodwill are examples for assets.
Assets can be classified into tangible and intangible.
Tangible Assets: These assets are those having physical
existence. It can be seen and touched. For example, plant &
machinery, cash, etc.

DILEEP S 24
 Intangible Assets: Intangible assets are those assets
having no physical existence but their possession gives
rise to some rights and benefits to the owner. It cannot
be seen and touched. Goodwill, patents, trademarks
are some of the examples.
Liabilities
Liabilities refer to the financial obligations of a
business. These denote the amounts which a business
owes to others, e.g., loans from banks or other persons,
creditors for goods supplied, bills payable, outstanding
expenses, bank overdraft etc.

DILEEP S 25
 Drawings
It is the amount of cash or value of goods withdrawn
from the business by the proprietor for his personal use.
It is deducted from the capital.
Debtors
A person (individual or firm) who receives a benefit
without giving money or moneys worth immediately,
but liable to pay in future or in due course of time is a
debtor.
Creditors
A person who gives a benefit without receiving money or
moneys worth immediately but to claim in future, is a
creditor.
DILEEP S 26
 Purchases
Purchases refer to the amount of goods bought by a
business for resale or for use in the production. Goods
purchased for cash are called cash purchases. If it is
purchased on credit, it is called as credit purchases.
Total purchases include both cash and credit purchases.
Purchases Return or Returns Outward
When goods are returned to the suppliers due to
defective quality or not as per the terms of purchase, it
is called as purchases return. To find net purchases,
purchases return is deducted from the total purchases.

DILEEP S 27
 Sales
Sales refers to the amount of goods sold that are
already bought or manufactured by the business.
When goods are sold for cash, they are cash sales but
if goods are sold and payment is not received at the
time of sale, it is credit sales. Total sales include both
cash and credit sales.
Sales Return or Returns Inward
When goods are returned from the customers due to
defective quality or not as per the terms of sale, it is
called sales return or returns inward. To find out net
sales, sales return is deducted from total sales.

DILEEP S 28
 Stock
Stock includes goods unsold on a particular date. Stock
may be opening and closing stock. The term opening
stock means goods unsold in the beginning of the
accounting period. Whereas the term closing stock
includes goods unsold at the end of the accounting
period.
Revenue
Revenue means the amount receivable or realised from
sale of goods and earnings from interest, dividend,
commission, etc.

DILEEP S 29
 Expense
It is the amount spent in order to produce and sell the
goods and services. For example, purchase of raw
materials, payment of salaries, wages, etc.
Income
Income is the difference between revenue and
expense.
Voucher
It is a written document in support of a transaction. It
is a proof that a particular transaction has taken place
for the value stated in the voucher. It may be in the
form of cash receipt, invoice, cash memo, bank pay-in-
slip etc. Voucher is necessary to audit the accounts.
DILEEP S 30
 Invoice
Invoice is a business document which is prepared when
one sell goods to another. The statement is prepared by
the seller of goods. It contains the information relating
to name and address of the seller and the buyer, the
date of sale and the clear description of goods with
quantity and price.
Receipt
Receipt is an acknowledgement for cash received. It is
issued to the party paying cash. Receipts form the basis
for entries in cash book.

DILEEP S 31
 Account
Account is a summary of relevant business
transactions at one place relating to a person, asset,
expense or revenue named in the heading. An account
is a brief history of financial transactions of a
particular person or item. An account has two sides
called debit side and credit side.

DILEEP S 32
DILEEP S 33
 Concepts

Money measurement concept

Business entity concept

Accounting period concept

Dual aspect concept

Realization concept

Accrual concept

Going concern concept

Cost concept

Objective Evidence Concept

Matching concept
DILEEP S 34
CONVENTIONS
Convention of Materiality

Convention of Consistency

Convention of Conservation

Convention of Disclosure

DILEEP S 35
Any Questions?

DILEEP S 36
DILEEP S 37